May 1, 2023

Dear Colleague, 

Fiscal policy reduced U.S. GDP growth by 0.2 percentage point at an annual rate in the first quarter of 2023, the Hutchins Center Fiscal Impact Measure (FIM) shows. The FIM translates changes in taxes and spending at federal, state, and local levels into changes in aggregate demand, illustrating the effect of fiscal policy on real GDP growth. GDP increased at an annual rate of 1.1% in the first quarter of 2023, according to the government’s latest estimate.

The fiscal drag on economic growth in the first quarter was driven by declines in real transfer payments by federal, state, and local governments, which lowered growth by 1.1 percentage points. This reflects, in large part, the waning effects of pandemic programs. This was partially offset by purchases by federal, state, and local governments, which raised the FIM by 0.5 percentage point, and a decline in tax collections, which raised it by 0.3 percentage point. 

As the FIM shows, fiscal policy provided significant support to economic growth when large swaths of the economy were shut down in 2020 during the COVID-19 pandemic. The FIM turned negative in the second quarter of 2021 as fiscal support waned. The negative impulse from fiscal policy has been diminishing over time. In the first quarter, fiscal policy subtracted just 0.2 percentage point from GDP growth.  

We expect the FIM to remain slightly negative through the first quarter of 2024 and then be roughly neutral thereafter. This projection assumes no changes in tax and spending legislation over the forecast period. 

Want to know more about our updates to the FIM? Read an explainer on the methodology.

Sincerely,

David Wessel

Director, Hutchins Center on Fiscal and Monetary Policy at Brookings